Section 68 additions for bogus LTCG from penny stocks deleted without incriminating material found during search

The ITAT Chandigarh held that additions under section 68 for bogus LTCG from penny stocks in a section 153A assessment cannot be sustained without incriminating material found during search. In completed assessments, the AO can only reassess if incriminating material is discovered during the search operation. The statement of a third party obtained during reassessment proceedings cannot be treated as incriminating material found during search. Since no incriminating material was found during the search in this case, the addition was deleted and the assessee's appeal was allowed.

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Issues Involved:
1. Legality of addition under Section 153A in absence of incriminating material.
2. Relevance and admissibility of statements recorded during investigation.
3. Treatment of share transactions and long-term capital gains (LTCG).

Issue-Wise Detailed Analysis:

1. Legality of Addition under Section 153A in Absence of Incriminating Material:

The primary issue in these appeals is whether additions can be made under Section 153A of the Income Tax Act in the absence of incriminating material found during the search. The assessee argued that no incriminating evidence was found during the search, and therefore, the addition of Rs. 87,04,733/- on account of LTCG was not justified. The judgment of the Hon'ble Supreme Court in the case of 'PCIT-III Vs. Abhisar Buildwell Pvt. Ltd.' was cited, which held that in the absence of incriminating material, no addition can be made for completed/unabated assessments. The Tribunal agreed with this view, stating that the share certificates and contract notes found in the locker of the assessee's family members did not constitute incriminating material as they corroborated disclosed transactions. Consequently, the addition made by the AO was directed to be deleted.

2. Relevance and Admissibility of Statements Recorded During Investigation:

The AO relied on statements recorded by the Investigation Wing, Kolkata, particularly those of Shri S.K. Khemka, to justify the addition. The assessee contended that these statements were recorded during investigations unrelated to the search on the assessee and were not incriminating evidence found during the search. The Tribunal noted that the statements were recorded well before the date of the search and were not part of the material found during the search. The Tribunal concluded that these statements could not be considered incriminating material for the purpose of Section 153A reassessment. Furthermore, the Tribunal emphasized that the assessee was not given an opportunity to cross-examine the individuals who made these statements, rendering the reliance on these statements unjustified.

3. Treatment of Share Transactions and Long-Term Capital Gains (LTCG):

The assessee had purchased shares of M/s Maple Goods (P) Ltd. in FY 2010-11, which were later amalgamated with M/s Access Global Ltd., and claimed LTCG exemption on the sale of these shares. The AO argued that the shares were penny stocks and the LTCG was bogus, relying on statements from brokers and financial data of the companies. However, the Tribunal found that the transactions were conducted through recognized stock exchanges, payments were made through banking channels, and all transactions were supported by documentary evidence. The Tribunal noted that the AO did not dispute the facts of the transactions but questioned their genuineness based on assumptions and statements recorded during unrelated investigations. The Tribunal concluded that the transactions were genuine and the LTCG claimed by the assessee was valid.

Conclusion:

The Tribunal held that in the absence of incriminating material found during the search, the addition made under Section 153A was not sustainable. The reliance on statements recorded during unrelated investigations without providing the assessee an opportunity for cross-examination was unjustified. The transactions related to the purchase and sale of shares were found to be genuine, and the LTCG claimed was valid. Consequently, the appeals filed by the assessees were partly allowed.

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